Sri Lanka petrol hiked to Rs149, diesel Rs123

ECONOMYNEXT – Sri Lanka’s petrol price has been raised to 149 rupees a litre from 145 rupees midnight September 10 and diesel to 123 rupees from 118 rupees the finance ministry said.

Super petrol (Octane 95) has been raised to 161 rupees from 157 a litre and super diesel to 133 rupees a litre from 130.

Raising fuel prices is a key defence against currency depreciation and inflation, as credit taken to subsidize fuel puts pressure on the currency, if it is accommodated by printed money.

There is no change in kerosene prices.

The rupee however has taken a beating after a massive liquidity shock of up to 58 billion rupees was delivered by the central bank to the credit system through a currency swap and the peg was not defended against the new liquidity, and the cash was allowed to remain without being permanently denied to banks for new credit (sterilized).

In general new money created from dollar purchases (to maintain a peg and prevent the currency appreciating – strong side defence) is not considered as ‘money printing’ becase the dollars in the reserves are available to defend the peg and stop appreciation. But under a ‘flexible exchange rate’ of not defending the currency in the weak side, the effect on the currency is the same as if the new rupees was created by Treasury bill acquisitions.

In April another liquidity shock was delivered which also weakened the currency because the peg was not defended. The depreciating currency adds to the fuel pricing formula. (Colombo/Sept10/2018)

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